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The Scott Boyar Tax Blog

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The Internal Revenue Service has gotten much leaner lately. The Center on Budget and Policy Priorities recently estimated that funding for enforcement is 20% below where it was in 2010.

But if you think hard times at the IRS mean easy times for tax filers, think again. Like so many things, the tax filing process has come to rely on more automation and fewer discerning human beings. That means all you need to do is befuddle one computer program, and you could be in trouble.

"Robo-audits" of taxpayers are increasingly common, said James Keller, executive editor with the tax and accounting business of Thomson Reuters, and are going to "become a bigger and bigger deal" when it comes to tax time.

That means it's more important than ever to leave no guesswork on your returns, because computers aren't capable of giving taxpayers any benefit of the doubt.

To reduce your likelihood of an audit come tax time, here are some common reasons IRS auditors and their computers may be suspicious about your return:

• Typos and bad math: If the form you get from your employer says one number and you input a different figure into TurboTax, you could open the door for an IRS audit. Common sources of IRS inquiries are "W-2s or 1099s that do not agree with the return," said John Piershale, a certified financial planner at Piershale Financial Group in Crystal Lake, Ill. To save yourself some headaches, double-check your numbers and income sources when you file.

• A big one-time change: "The IRS now uses an electronic statistical sampling system to select returns for audits," Piershale said. In layman's terms, that means any items outside the usual range for American taxpayers or even from your previous personal filings could trigger a red flag with the IRS.

• Doubled dependents: If there have been changes in your household situation, make certain any dependents are claimed on only one taxpayer's return. "Claiming dependents that have been claimed by someone else or have already filed a return and have claimed themselves" is a common source of audits, said Paul Dunham, tax managing director at business services firm CBIZ.

• Odd itemized deductions: "If a taxpayer has an unusually high amount of itemized deductions given their income levels, an audit is potentially more likely," Dunham said. Claiming any deductions but not including proper documentation can rub the tax man (or robot) the wrong way.

• More than $1 million in income: "As one might expect, the higher the adjusted gross income, the more likely the taxpayer is going to be audited," Dunham said. He points to IRS audit statistics that show roughly half of audits occur to those reporting $1 million or more in income.

• Zero income: Dunham points out that another red flag is the lack of any income, particularly self-employed individuals running their own business. In some cases, unprofitable businesses are either simply set up to reap the benefits of tax breaks or are significantly underreporting income – neither of which sits well with the IRS.

What happens if you legitimately fall into one of these categories through no fault of your own? For starters, tax experts agree you should never forgo tax benefits simply for fear of an audit; Truthful taxpayers acting in good faith have nothing to fear.

Secondly, remember the initiation of an IRS enquiry is nothing personal – and in fact, that impersonal nature is what prompts many audits.

"In an odd way, your income tax return is presenting your financial picture to somebody that you don't know," said Keller of Thomson Reuters. He said the IRS sends "millions and millions" of Automated Correspondence Exam notices each year based on computer algorithms that simply see something they can't make sense of. Thus, the simplest way to defuse the threat of an audit is simply to promptly respond and set the record straight.

"Make it easy for the IRS to track what they're seeing," Keller said. He recommended that anyone who gets a notice should "include a copy of what the IRS sent to them, maybe come up with a little spreadsheet or calculation that shows how you came up with the numbers – make it easy for the IRS to take a look at it and say, 'Either that's correct or that looks reasonable, so we're going to move on to the next case.' "

In fact, there's nothing wrong with sending along a pre-emptive explanation with tax forms when you know you have a situation that is unique.

"If I feel that the numbers are going to be out of whack at face value, I think it's a good idea to attach an explanation," Keller said. "As long as you're being honest and upfront, I don't think that's going to hurt you."

The bottom line is transparency and honesty, providing documents and explanations when necessary, so the IRS realizes you're not part of the problem.

"If people take a common-sense approach and look at it as presenting info to somebody that doesn't know you, stuff can go a lot smoother that way," Keller said.

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